5 Prime Picks to Beef Up Your Portfolio
12/01/2011 9:30 am EST
Despite a barrage of wicked headlines from Europe, domestic equities have held their ground remarkably well in recent weeks and more good news is to come, at least in the short term, writes Richard Band of Profitable Investing.
The headline indices likely will make one more upside run in December, lifting the S&P 500 to 1,300 or a little higher.
After that, the crystal ball clouds over. I’m not ruling out a happy resolution to Europe’s problems, but I’m not counting on it. The $64 trillion question, of course, is whether the slump will spread to other parts of the world, including the United States. Within a few months, we’ll know.
Meanwhile, the flow of events “over there” bears an eerie resemblance to America’s mortgage crisis as it unfolded in late 2007 and early 2008. Policymakers tried to stick one patch after another on the deflating balloon. None of the fixes worked for long. Ultimately, stock markets worldwide paid the price.
It might not be too late to avoid a similar fate this time—if Greece and now especially Italy grasp the nettle and promptly carry out their promised fiscal reforms. However, the capital markets’ patience has just about run dry.
To cope with this high-risk environment, replace high-volatility stocks with safer dividend stocks. As a rule of thumb, any stock that fell more than 25% during the July-August swoon is a candidate for elimination. Replacements should throw off a dividend yield of at least 3%.
Here are five such dividend stocks to buy now.
During the spring and summer, takeover speculation swirled around Clorox, the maker of bleach and Glad bags and Brita water-filtration systems. At one point, in fact, activist investor Carl Icahn proposed buying the company for $80 per share.
However, Icahn has since backed away, and the takeover groupies have exited the stock. Result: The share price has cooled down, presenting an opportunity for patient, long-term investors.
Not only does CLX throw off a generous 3.7% dividend, but the company also has upped its payout 34 years in a row. The latest increase (in May 2011) amounted to a healthy, inflation-beating 9%.
Buy CLX up to $66.70. I’m projecting a total return (dividends plus price gain) of 12% to 15% in the year ahead.
Waste Management, the trash hauler, operates a steady, recession-resistant business—just the ticket in a sluggish economy.
Moreover, judicious bolt-on acquisitions are helping the company to fatten its bottom line through economies of scale. The trash industry is highly fragmented, inviting consolidators like WM to take over smaller rivals and squeeze out overlapping costs.
Topping off the investment case, the shares yield 4.4%. Dividends, piled higher each year since 2004, have grown 54% in the past five years alone.
Buy WM up to $33.10. As with CLX, I’m projecting a total return (dividends plus price gain) of 12% to 15% in 2012.
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Among consumer staples, my appetite is returning for Kellogg. Tony the Tiger has tripped on his tail lately, running up some unwelcome expenses for product recalls and more defensible costs for supply-chain improvement and advertising/marketing.
However, lost in the negative buzz is that the company is almost certain to post record profits in 2011—and 2012 should bring another all-time high. With the stock now trading about 16% below its average P/E for the past five years (based on forward earnings estimates), Kellogg has plenty of room for appreciation as the company’s investments in building the business start to pay off.
The current yield is 3.5%. Buy K up to $50.
In November, food-and-beverage company PepsiCo. acquired privately held Grupo Mabel, the second-largest maker of cookies in Latin America, in a bid to unlock long-term growth opportunities in key emerging markets.
PEP already boasts 19 brands with annual sales over $1 billion and is projected to grow faster than archrival Coca-Cola (KO) through 2016. PEP’s forward P/E ratio, based on the next four quarters’ estimated earnings, is virtually the same as at the March 2009 major low.
And even if the economy worsens in 2012, you can count to PepsiCo to keep growing and keep “sharing the wealth” (dividends) with you: The company has sweetened dividends every year since 1973.
The current yield is 3.3%. Buy PEP up to $64.
Government Properties Income Trust (GOV)
Another dividend investment worth accumulating, even in a dicey market, is Government Properties Income Trust. This rock-solid office REIT owns 64 office buildings in 26 states and the District of Columbia.
Tenant occupancy stands at 96.1%. And what a tenant list it is: 74% of the trust’s rents are paid by the US government, 14% by state governments, and 6% by the United Nations. The average remaining lease term is four years, allowing plenty of time to negotiate renewals (government tenants do typically renew).
Debt is very low, too, at only 34% of book capitalization. Yet GOV yields a lush 8%. Buy GOV up to $23.